CAISO Straw Proposal for CRR Credit Policy Shucheng Liu Principal - - PowerPoint PPT Presentation

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CAISO Straw Proposal for CRR Credit Policy Shucheng Liu Principal - - PowerPoint PPT Presentation

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CAISO Straw Proposal for CRR Credit Policy Shucheng Liu Principal Market Developer Stakeholder Conference Call May 4, 2007 California Independent System Operator Corporation Topics Credit requirement for participating in CRR allocation

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CAISO Straw Proposal for CRR Credit Policy

Shucheng Liu Principal Market Developer Stakeholder Conference Call May 4, 2007

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California Independent System Operator Corporation

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Topics

– Credit requirement for participating in CRR allocation and auction – Credit requirement for holding CRR – Long-Term CRR credit requirement – Compliance measures – Market monitoring and mitigation – Examples of CRR credit requirement – Next steps

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California Independent System Operator Corporation

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Credit Requirement to Participate in CRR Allocation

CAISO will require no advance credit deposit to

participate in CRR allocation

However, holder of the CRRs allocated will be

subject to credit requirements

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California Independent System Operator Corporation

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Credit Requirement to Participate in CRR Auction

Bidding for positively priced CRRs:

– Credit deposit sufficient to cover bids – No credit margin needed during auction

Bidding for negatively priced CRRs

– No credit requirement to participate – No payment to auction winners until credit requirements for holding the CRRs are in place

CRRs will be paid at the conclusion of the auction

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California Independent System Operator Corporation

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Credit Requirement to Hold CRR

Same credit requirement criteria apply to all CRR

holders

Overall credit requirement is assessed for the

whole portfolio of CRRs of each holder

– An option to consider: assessing credit requirements for each individual CRR, i.e. no netting. (will discuss later)

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California Independent System Operator Corporation

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Two Components of CRR Credit Requirement

CRR expected value

– Credit coverage for the negative auction price of a CRR paid to the holder – A deterministic value determined in the auction process

Credit margin

– Credit coverage that recognizes the potentially volatile nature of the CRR – A percentile value determined on the probability distribution of the value of the CRR

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California Independent System Operator Corporation

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Short-Term CRR Credit Requirement

Credit requirement of a CRR with a term of 1 year

  • r less

That is

Value CRR Percentile 5th t Requiremen Credit − = Value CRR Percentile 5th Value Expected CRR Margin Credit − = Margin Credit Value Expected CRR t Requiremen Credit + − =

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California Independent System Operator Corporation

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Short-Term CRR Credit Requirement − Low Positive Expected CRR Value

Value CRR Percentile 5th Value Expected CRR Margin Credit − = Value CRR Percentile 5th t Requiremen Credit − =

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California Independent System Operator Corporation

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Short-Term CRR Credit Requirement − High Positive Expected CRR Value

Value CRR Percentile 5th Value Expected CRR Margin Credit − = Value CRR Percentile 5th t Requiremen Credit − =

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California Independent System Operator Corporation

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Short-Term CRR Credit Requirement − Negative Expected CRR Value

Value CRR Percentile 5th Value Expected CRR Margin Credit − = Value CRR Percentile 5th t Requiremen Credit − =

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California Independent System Operator Corporation

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Factors to Consider in Deciding Short-Term CRR Credit Requirement

Options: also consider 2.5th and 1st percentile

values

Criteria: a balance between financial requirements

and risk tolerance

– Too low requirements may increase financial risk

As CRRs are settled with other market charges, a payment

default by the holder could create a shortfall that would affect all net creditors in the month of settlement.

– Too high requirements may discourage participation and reduce liquidity and effectiveness of the CRR market

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California Independent System Operator Corporation

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Calculation of Short-Term CRR Credit Requirements

Credit requirement for each CRR will be calculated Based on the CAISO LMP study data for the first

year

Actual historical LMP data will be used in the future Other ISO data will be used as references

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California Independent System Operator Corporation

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Short-Term CRR Credit Requirement − Examples

CRR A B C D Portfolio Statistics

Expected Value

  • 6,807
  • 13,556

21,298 316 1 Percentile

  • 8,281
  • 19,786

19,919

  • 290

2.5 Percentile

  • 7,723
  • 16,385

20,050

  • 63

5 Percentile

  • 7,235
  • 15,162

20,076 296

Credit Margin ($/MW-Year)

1 Percentile 1,473 6,230 1,379 606 2.5 Percentile 916 2,829 1,248 379 5 Percentile 428 1,605 1,222 20

Credit Requirement ($/MW-Year)

1 Percentile 8,281 19,786

  • 19,919

290 8,438 2.5 Percentile 7,723 16,385

  • 20,050

63 4,121 5 Percentile 7,235 15,162

  • 20,076
  • 296

2,025

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California Independent System Operator Corporation

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Four Options Proposed for Determining Long-Term CRR Credit Requirement

Option 4:

Margin Credit year 1 Value Expected CRR year 1 n + − ) ( * ) ( Margin Credit year 1 Value Expected CRR year 1 n* + −

Option 1: ) ( ) ( * Margin Credit year 1 * n Value Expected CRR year 1 n + − Option 2:

Margin Credit year 1 Value Expected CRR year 1 + −

Option 3:

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California Independent System Operator Corporation

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Factors to Consider in Deciding Long-Term CRR Credit Requirement

Of the four options:

– Option 1 is the most conservative, and Option 3 is the least – The CAISO has preference toward Option 2 or 4

Criteria: a balance between financial requirements

and risk tolerance

– Too low requirements may increase financial risk – Too high requirements may discourage participation and reduce liquidity and effectiveness of CRR market

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California Independent System Operator Corporation

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Long-Term CRR Credit Requirement − Examples ($/MW)

CRR A B C D Portfolio Statistics

1-Year Expected Value

  • 6,807
  • 13,556

21,298 316 1,251

Option 1:

) ( Margin Credit year 1 Value Expected CRR year 1 n* + − 1 Percentile 82,809 197,861

  • 199,194

2,901 84,377 2.5 Percentile 77,231 163,854

  • 200,501

626 41,209 5 Percentile 72,347 151,619

  • 200,761
  • 2,957

20,249

Option 2:

) ( ) ( * Margin Credit year 1 * n Value Expected CRR year 1 n + −

1 Percentile 72,734 155,264

  • 208,624
  • 1,243

18,131 2.5 Percentile 70,970 144,510

  • 209,037
  • 1,963

4,480 5 Percentile 69,421 140,641

  • 209,119
  • 3,096

Option 3:

Margin Credit year 1 Value Expected CRR year 1 + − 1 Percentile 8,281 19,786

  • 19,919

290 8,438 2.5 Percentile 7,723 16,385

  • 20,050

63 4,121 5 Percentile 7,235 15,162

  • 20,076
  • 296

2,025

Option 4:

Margin Credit year 1 Value Expected CRR year 1 n + − ) ( * 1 Percentile 69,548 141,794

  • 211,605
  • 2,554

2.5 Percentile 68,990 138,393

  • 211,736
  • 2,781

5 Percentile 68,497 137,170

  • 211,762
  • 3,140
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California Independent System Operator Corporation

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Long-Term CRR Credit Requirement Adjustment

Adjust no less than annually Account for change in remaining terms Reflect changes of CRR ownership Update expected value and credit margin based on

actual market operation data

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California Independent System Operator Corporation

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Additional Credit Requirements for LT-CRRs Held by External LSEs

Maintain one year credit coverage for WAC

prepayment

– One year of WAC commitment is added to the EAL – No need to post additional credit as long as ACL is greater than EAL including WAC prepayment – Entities would then prepay the WAC on a monthly basis – Consistent with FERC April 20 Order

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California Independent System Operator Corporation

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Compliance Measures for Failure to Meet Credit Requirements

Terminate all CRR agreements with the default

holder

Retain all payments due to the CRRs and resell the

CRRs in subsequent auctions

Retain financial security sufficient to cover default Exclude the holder from future CRR allocation and

auctions

Prohibit the holder from subsequently acquiring

CRRs

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California Independent System Operator Corporation

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Market Monitoring and Mitigation Measures

FERC and CAISO market rules prohibit Market

Manipulation

CAISO DMM will monitor unusual activities in CRR

allocation and auction processes

For misconduct, the CAISO will

– Require disclosure of affiliations – Explicitly warn participants – Refer to FERC

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California Independent System Operator Corporation

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Credit requirements assessed for each individual

CRR in a portfolio separately

Short-Term CRR Credit Requirement without Credit Offset (i.e. no netting)

Credit Margin:

Value CRR Percentile 5th Value Expected CRR Margin Credit −

Credit Requirement

= ) 5 , max( Value CRR Percentile th t Requiremen Credit − =

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California Independent System Operator Corporation

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Four Options for L-T CRR Credit Requirement without Credit Offset

Option 4:

Margin Credit year 1 Value Expected CRR year 1 n + − ) , max( * ) , max( Margin Credit year 1 Value Expected CRR year 1 n* + −

Option 1: ) ( ) , max( * Margin Credit year 1 * n Value Expected CRR year 1 n + − Option 2:

) , max( Margin Credit year 1 Value Expected CRR year 1 + −

Option 3:

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California Independent System Operator Corporation

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Short-Term CRR Credit Requirement without Offset − Examples

CRR A B C D Portfolio Statistics

Expected Value

  • 6,807
  • 13,556

21,298 316 1 Percentile

  • 8,281
  • 19,786

19,919

  • 290

2.5 Percentile

  • 7,723
  • 16,385

20,050

  • 63

5 Percentile

  • 7,235
  • 15,162

20,076 296

Credit Margin

1 Percentile 1,473 6,230 1,379 606 2.5 Percentile 916 2,829 1,248 379 5 Percentile 428 1,605 1,222 20

Credit Requirement

1 Percentile 8,281 19,786 290 28,357 2.5 Percentile 7,723 16,385 63 24,171 5 Percentile 7,235 15,162 22,397

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California Independent System Operator Corporation

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LT-CRR Credit Requirement without Offset − Examples ($/MW)

CRR A B C D Portfolio Statistics

1-Year Expected Value

  • 6,807
  • 13,556

21,298 316 3,251

Option 1:

) , max( Margin Credit year 1 Value Expected CRR year 1 n* + − 1 Percentile 82,809 197,861 2,901 283,571 2.5 Percentile 77,231 163,854 626 241,710 5 Percentile 72,347 151,619 223,966

Option 2:

) ( ) , max( * Margin Credit year 1 * n Value Expected CRR year 1 n + −

1 Percentile 72,734 155,264 4,361 1,917 234,276 2.5 Percentile 70,970 144,510 3,948 1,197 220,625 5 Percentile 69,421 140,641 3,866 64 213,992

Option 3:

) , max( Margin Credit year 1 Value Expected CRR year 1 + − 1 Percentile 8,281 19,786 290 28,357 2.5 Percentile 7,723 16,385 63 24,171 5 Percentile 7,235 15,162 22,397

Option 4:

Margin Credit year 1 Value Expected CRR year 1 n + − ) , max( * 1 Percentile 69,548 141,794 1,379 606 213,327 2.5 Percentile 68,990 138,393 1,248 379 209,010 5 Percentile 68,497 137,170 1,222 20 206,909

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California Independent System Operator Corporation

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ST-CRR Credit Requirement Comparison − With and without Credit Offset

CRR A B C D Portfolio Credit Margin ($/MW-Year)

1 Percentile 1,473 6,230 1,379 606 2.5 Percentile 916 2,829 1,248 379 5 Percentile 428 1,605 1,222 20

Credit Requirement ($/MW-Year, with Credit Offset)

1 Percentile 8,281 19,786

  • 19,919

290 8,438 2.5 Percentile 7,723 16,385

  • 20,050

63 4,121 5 Percentile 7,235 15,162

  • 20,076
  • 296

2,025

Credit Requirement ($/MW-Year, without Credit Offset)

1 Percentile 8,281 19,786 290 28,357 2.5 Percentile 7,723 16,385 63 24,171 5 Percentile 7,235 15,162 22,397

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California Independent System Operator Corporation

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LT-CRR Credit Requirement Comparison − With and without Credit Offset

($/MW) With Credit Offset Without Credit Offset CRR C D Portfolio C D Portfolio Option 1

1 Percentile

  • 199,194

2,901 84,377 2,901 283,571 2.5 Percentile

  • 200,501

626 41,209 626 241,710 5 Percentile

  • 200,761
  • 2,957

20,249 223,966

Option 2

1 Percentile

  • 208,624
  • 1,243

18,131 4,361 1,917 234,276 2.5 Percentile

  • 209,037
  • 1,963

4,480 3,948 1,197 220,625 5 Percentile

  • 209,119
  • 3,096

3,866 64 213,992

Option 3

1 Percentile

  • 19,919

290 8,438 290 28,357 2.5 Percentile

  • 20,050

63 4,121 63 24,171 5 Percentile

  • 20,076
  • 296

2,025 22,397

Option 4

1 Percentile

  • 211,605
  • 2,554

1,379 606 213,327 2.5 Percentile

  • 211,736
  • 2,781

1,248 379 209,010 5 Percentile

  • 211,762
  • 3,140

1,222 20 206,909

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California Independent System Operator Corporation

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Next Steps

Stakeholder written comments requested by May

11 (CRRComments@caiso.com)

Second stakeholder conference call to discuss final

policy proposal in mid May

Presentation to the CAISO Board for decision in

late May

FERC filing in early June